Oligopoly

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An oligopoly is a market characterized by a small number of firms
who realize they are interdependent in their pricing and output
policies. The number of firms is small enough to give each firm some
market power
Agenda
Unique characteristics of the oligopoly market structure
Advantages and Disadvantages of Oligopoly
Collusive Oligopoly
Course Objectives
Identify the advantages and disadvantages of Oligopoly
Determine the characteristics of Oligopoly
Explain collusion and cartels
 The term Oligopoly derives from the Latin ‘olígoi’ – meaning
“few”, and ‘pōléō’ – meaning “to sell”.

An oligopoly is an imperfectly competitive market structure

consisting of a few large firms that sell identical or
differentiated products.

What is Oligopoly is a market with a very small number of major

Oligopoly? players.

It is a highly concentrated market.

It does not mean there are just two or three competitors.
There could be dozens of them. However, there are only a
few dominant ones.
In most oligopolies, each dominant rival is
aware of what the major players are doing.
They are aware because there are so few
dominant players. Therefore, keeping an eye
on each other is relatively easy.
Characteristics of Oligopoly
1. Identical(homogeneous) or differentiated products:
The products sold by firms within the oligopoly market structure can
be either identical or differentiated
2. Few large firms:
The oligopoly market structure consists of a few, large firms that
dominate the industry
3. Concentration ratio:
In an oligopoly, we determine the extent of market power by
considering the concentration ratio.
4. Firms are price makers:
In an oligopoly, firms have greater market power than they do in
more competitive markets.
5. Interdependent strategic behaviour:
Due to the limited number of firms in an oligopoly, each firm’s
behavior is closely based off the other firms.
There is a possibility for collusion and the formation of cartels.
Advantages of Oligopoly
•low level of competition;
•higher potential to receive big profits;
•products and services controlled through oligopolies are in great demand;
•a limited number of companies makes it easier for customers to compare products;
•easier for people to choose products;
•competitive prices;
•a better quality of products and services since brands need to survive in the market;
•better customer support;
•price stability within the market;
•more informative ads.
Disadvantages of Oligopoly
•limited customer choice;
•high barriers to entry;
•companies uninterested in innovations since the level of competition is low.
Examples of Oligopoly
Entertainment. Hollywood with its movie production studios has
been an oligopoly for a long time. Disney, Warner Bros. Pictures,
Universal, and Sony are the biggest movie studios based on their
market share.
Airlines. The airline industry of the United States can be also
referred to as an oligopoly since four main domestic airlines
dominate in the market. They are American Airlines, Delta Air Lines,
Southwest Airlines, and United Airlines.
Social media. As of 2021, there are 3.96 billion users of social media worldwide.
Today, we can’t even imagine our lives without the main social media platforms
like Facebook, Instagram, and Twitter. The market is dominated by the
mentioned channels. Facebook is considered the world’s biggest social media
platform because it has 2.45 billion monthly active users.
Big technology. When we talk about oligopolies in big tech, we usually mean
operating systems for phones, laptops, or PCs. Among smartphones, customers
can choose between Apple iOS and Android. If you need a computer or laptop,
the choice isn’t too big either since Apple and Microsoft Windows are the most
popular and thus the most influential.
Automobile manufacturers. Although the world knows dozens of
automobile manufacturers and people can choose any, in the US the
situation is quite different. General Motors, Ford Motor Company,
and Stellantis North America are the largest automakers. They
represent an oligopoly.
Collusive Oligopoly
When oligopolist firms consider what quantity to produce and what
price to charge, they face a temptation to work with the other firms
to act as if they were a single monopoly. By acting together,
oligopolistic firms can hold down industry output, charge a higher
price, and divide the profit among themselves. When firms act
together in this way to reduce output and keep prices high, it is
called collusion.
A group of firms that have a formal agreement to collude to produce
the monopoly output and sell at the monopoly price is called
a cartel.
They collude as if they were a single monopoly, and try to fix
minimum prices.

They also try to fix volumes and other terms of business.

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